Business is Just a Game of Incentives
The Amplified Impact Podcast
January 29th, 2023
Diving into a key entrepreneur challenge today: incentives.
Ever wonder why people act a certain way? It all boils down to what’s in it for them.
Charlie Munger said we should spend our time thinking about incentives.
Not just about cash…think community, connections, and all that good stuff.
I’ll spill the beans on a real-life story from our manufacturing days and how we turned around attendance issues.
Because, at the end of the day, humans aren’t just coin-operated machines. Money’s a motivator, sure, but we’ve got more levers to pull.
It’s important to find a stronger motivator than personal gain.
TWEETABLE QUOTE:
“I think when you understand the incentives of the people around you and then how to craft incentives that get people incentivized to work in alignment with your goals, that is when you really start to unlock serious amounts of growth within your business.”
– Anthony Vicino
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Episode Transcript:
So one of the biggest problems that I’ve seen that we have to solve for as entrepreneurs within our business, whether it’s, you know, dealing with ourselves, it’s dealing with our employees, dealing with our customers, dealing with our vendors, is the question of incentives underlying everything that we do? Is the question of, well, what’s in it for me? Why am I incentivized to take this action versus that action? And I think when you understand the incentives of the people around, around you and then how to craft incentives that get people incentivized to work in alignment with your goals, that is when you really start to unlock serious amounts of growth within your business and at least minimize a lot of the headaches.
In fact, this is one of the things Charlie Munger talked about during his life, was that as the founder or the owner of a company, you should be spending the majority of your time simply thinking about incentives. How do you incentivize certain behaviors? How do you deincentivize other behaviors? And it’s so interesting that often in life, when we feel like we’re being wronged in some way or somebody isn’t doing what we want them to do, it’s simply a matter of asking ourselves, well, what’s in it for them? Right? What is their incentive to act the way I want them to versus the way that they are currently acting? And what you’ll typically notice when you go through that thought experiment is that they are more incentivized to act in their current way, their current manner than the incentives that they would receive if they were to act in alignment with the way that you wanted them to act. And so that could be, in the instance of your customers, you want them to feel incentivized to buy this product, right? Because the incentive is this product is worth more to them. It will bring them more value than the money they’re exchanging for it. For your employees. This could be, I am incentivized to show up and do a fantastic job at work because it is more in my favor, more in my interest to do that rather than to not show up for work or to show up and not work hard. Right.
And so a lot of times, specifically when it comes to employees, I think this is where a lot of people get tripped up, is they think, oh, I’m paying you to be here. That is your incentive. And the alternative is to not get paid for being here. And so therefore, you should want to be here. But humans are not coin operated machines, and so we do need money, and we know how important money is, but we often acted irrationally when it comes to money and when it comes to what’s in our best interest in the long term. And we prioritize often what’s in our best interest in the short term. Right. And so we talk about this all the time on the podcast.
That cheap dopamine is easy, and it’s abundant, but it has a higher price tag in the long run. The problem is, most people don’t stop to calculate what is the actual cost of taking the short term gratification now versus delaying it. We know that long term delayed gratification is a key marker of success in life and in business. But most people don’t have that skill, and so they are incentivized to act in their short term best interest versus their long term, which is why you get behaviors from people like not showing up for work. And this was a really big problem that we had in our manufacturing company. On the manufacturing line, we had a really hard time getting people to show up consistently for their shifts. We would get all sorts of excuses multiple times per week from multiple different employees saying, oh, my car broke down. Oh, my kid is sick.
Oh, I’m sick. Oh, this thing came up. Oh, I can’t come in. I can’t make it, for whatever reason. And a lot of times, I’m sure there’s a legitimate excuse, but if you just look at the pattern of behavior, it really correlates around certain individuals, typically more so than others, and it’s so consistent as to make you wonder, is this actually a sequence of unfortunate events that is occurring seemingly every single week, every two weeks, like clockwork? Or is this simply that they are not showing up because they don’t want to come in because they’re tired, they’re lethargic, they don’t feel like it. They have these other things that they want to do. They’d rather sit home and watch Netflix, whatever. And I know from my own personal experience, having been a w two employee for 15 years, from when I was 15 to when I was 30, that I was that guy who was calling out all the time with makeshift.
I can’t tell you how many times my grandmother died. Right. I’ve used that excuse so many times. And so I know if I’m guilty of doing that, there’s a high probability that others are doing it as well. So then the question is simply, how do we incentivize people to actually show up? And we spent a lot of brain power on this, trying to figure this one out because it was costing us a lot of potential upside to not have employees regularly, consistently showing up. It made it very hard to deliver a consistent, awesome product on time to our customers. And so what we really started thinking is that, okay, how do we start using some of these tools of influence that we read about in the book by Robert Chialdini called influence. Right? He talks about six weapons of influence.
And we thought, how can we start to change the incentive structure so that people are more incentivized to come in? We knew that money alone wasn’t going to cut it, and so we started thinking, okay, what is another lever we could pull? And what we landed on was consistency and liking. Those are two separate levers. So liking is we do things for people we like, and we want people to like us, and we want to act consistent in a way that is consistent with our internal image or identity that we have for ourselves. And so we did is we set up a company wide, and in many cases, department wide bonus pool based on attendance and what this did. So, for example, maybe it’s like $5,000 at the end of each month will be evenly split between everybody in the department. If nobody misses a day, if the department Overall misses five days or 5% of days, or however you want to structure this, then that bonus pool goes down and it continues dropping. Right? And so what this does now is when somebody decides, I don’t want to come in. Now we are leveraging community.
And the fact that they’re not just letting themselves down, they’re letting down their buddy on the line. And in a lot of times because these relationships at work are so close. And, you know, when your buddy is calling out for a bullshit reason, like, you know, right now, they can get on the horn with that guy and be like, dude, get your ass in here. What are you doing? You’re fine. And we would often in this new situation, have people showing up late, they call out, but then a couple of hours later, they would magically show up because their buddies gave them shit. And so we had systems built in so that if they showed up, then they had an opportunity to recoup the bonus pool. If they showed up and only missed, like, x number of hours and then they came in on the weekend or they made up the shift in some future way, then we could reset the pool. And this was very, very helpful for leveraging the desire to not let down the team.
And we saw a big boost. And so there’s just a simple matter, like, simply tweaking the incentives from being like, you’re making money or losing money to now you not showing up is directly impacting your buddy. And that, I find, is a far stronger motivator in a lot of cases than just showing up for yourself. Now, you don’t want to just discipline or penalize the people who are consistently showing up, because, again, the number of people who do this, the number of shit bricks, as I call them, like myself, I was one of these. It’s usually a small minority of the team, and so we don’t want to punish the high performers who are consistently showing up. And so it’s also good to set up individual based bonuses based on individual show rates. Right? But this is just a question of incentives. And when we’re thinking about our businesses, if something isn’t going the way we want, or people aren’t behaving consistent with the way we want them to behave, we have to ask ourselves, what’s in it for them? Are they being properly incentivized? Am I pulling the right levers? In a lot of cases, we think, I gave you money, and so now you need to act like this monkey that does what I say.
But humans, again, are not coin operated machines, and so you have to be able to pull more than just that one lever. And a lot of times I think employers feel like that’s the only lever I have, is I pay you or I don’t pay you. That’s it. And it’s like, no, you don’t. You have more. You just have to get creative with how you incentivize that. So hope this brings you guys some values. If you’re struggling getting people showing up to their shifts, hopefully this is something to think about.
Maybe you could employ in your business and it’ll help you out. So thanks for being here, guys. We’ll catch you in the next episode. Until then, stay hyper focused. My ones.
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